Legal fallout over Olympus scandal likely to be limited

ISSEI KATO, Reuters Photo

Passers-by walk past the company logo of Olympus Corp. in Tokyo Monday. The U.S. Federal Bureau of Investigation is probing the massive advisory fee paid by Japan's Olympus Corp. in its takeover of a British company.

Passers-by walk past the company logo of Olympus Corp. in Tokyo Monday. The U.S. Federal Bureau of Investigation is probing the massive advisory fee paid by Japan's Olympus Corp. in its takeover of a British company. (ISSEI KATO, Reuters Photo)

Staff and wire reports

Even though Olympus Corp. admitted this week to cooking its books, the Japanese company with Lehigh Valley ties is unlikely to face the kind of legal consequences that are common in such cases on this side of the Pacific Ocean.

Former Olympus officials face as long as 10 years in prison if investigations into the company's claims that they hid decades of losses lead to convictions for fraud, falsification of financial statements or aggravated breach of trust.

The Tokyo Prosecutor's Office is investigating Olympus on suspicion the company broke securities laws after the camera-maker said Nov. 8 that ex-Chairman Tsuyoshi Kikukawa, former Executive Vice President Hisashi Mori and auditor Hideo Yamada colluded to hide losses by paying inflated fees to advisers.

"The allegations appear to be a classic accounting or securities fraud and are significant enough that Japanese authorities may take firm action," said Samuel Williamson, a partner in Kirkland & Ellis LLP's white collar criminal investigations and government enforcement practice.

However, prison for such offenses in Japan are rare, said Williamson, a former U.S. Department of Justice prosecutor now based in Shanghai. While the founder of Internet startup Livedoor Inc. Takafumi Horie is serving two years in prison for accounting fraud, the former president of cosmetics-maker Kanebo Ltd. Takashi Hoashi had his two-year sentence for the same crime suspended when it was issued in 2006.

Moreover, Olympus Corp. shareholders burned by the Japanese company's accounting scandal are unlikely to recover investment losses in U.S. courts and might not fare much better suing in Japan.

Stockholders and bondholders often turn to U.S. courts in hopes of winning damages from companies, banding together in class-action lawsuits that let them sue as a group.

But two recent court decisions may have essentially shut U.S. courthouse doors to shareholders of the 92-year-old company, whose stock plunged in the wake of revelations that it hid losses since the 1990s.

Last year, the U.S. Supreme Court, in a case known as Morrison v. National Australia Bank Ltd, curbed investors' ability to sue in U.S. courts over their purchases of securities on non-U.S. exchanges. The Morrison decision scuttled a longtime standard that let U.S. and non-U.S. investors who bought non-U.S. stocks on non-U.S. exchanges invoke federal securities fraud laws if significant wrongful conduct took place in the United States.

"Post-Morrison, American investors including institutional investors have effectively no remedy for this type of blatant securities fraud," said Thomas Dubbs, a partner at Labaton Sucharow who argued on behalf of the Morrison plaintiffs in the Supreme Court. "They can try to go to Japan — but good luck."

Unlike in the United States, there is no class-action litigation in Japan. Shareholders must actively band together to sue — they must opt into a lawsuit rather than opt out. This makes it harder to get large groups of plaintiffs together to seek bigger recoveries, and keeps legal costs down.

This week, Olympus admitted that it hid investment losses dating to the 1990s and in 2008 used a series of overpriced acquisitions, some of which were quickly written down, to cover up the losses. One of those purchases also involved exorbitant payments to financial advisers.

Shares have fallen 76 percent in Tokyo since Oct. 14, when the company fired Chief Executive Michael Woodford. He later publicly campaigned to get Olympus to explain its deal-making, leading to this week's revelations.

The stock decline has wiped out more than $6 billion of market value at the 92-year-old company, Reuters data show.

Olympus' U.S. headquarters is at the Stabler Corporate Center in Center Valley. Olympus Corporation of the Americas relocated from Long Island, N.Y., to Upper Saucon Township in 2006 in one of the Lehigh Valley's biggest-ever corporate recruiting triumphs.

At the end of 2010, the company — whose products include digital cameras, research microscopes and minimally invasive surgical devices — had more than 900 Lehigh Valley employees and an annual local payroll of $100 million. However, an unspecified number of layoffs were announced in the summer. The workforce now stands at 860 employees, according to a company spokeswoman.

Those cost-cutting measures followed huge losses that Olympus recorded in 2009 as a result of the unusual dealings that prompted Woodford to speak out